The announcement by Finance Minister Trevor Manuel that the tax on the build up of retirement funds is to be reduced from 25 percent to 18 percent is significant, particularly for those rertirement fund members who are still some way from retirement.
Many people, because they do not see the evidence of deductions, such as taxes and costs, from their retirement fund savings, do not realise the impact that it has on the amount of money they will have available at retirement.
The tax is levied on the interest, net rental income and foreign dividends that accure to a retirement fund. Retirement fund savings are normally conservatively invested, with at least 40 percent, and often more, invested in fixed-interest type investments, rather than shares. Fixed-interest-type investments include those in the money market, in bonds (loans to big borrowers), and in property (which generates taxable rentals).
With 40 percent or more in these investments, the retirement fund will pay a substantial amount in tax.
This week Sanlam Employee Benefit, assuming that a retirement fund invested 40 percent of R100 000 in fixed-interest investments, calculated that:
- at the old rate of 25 percent, the tax amounted to R1 200 a year;
- at the new rate of 18 percent, the tax amounted to R864, a saving of R336 (0.336 percent).
The effect of the 18 percent tax rate remains significant. The lower tax on retirement funds still reduced the annual return of a reitrement fund investment by 0.864 percent a year. Inclusion of net rentals and foreign divdends would make the calculations worse.
Sanlam says: "The effect of the tax saving of 0.336 percent over just one year may not look significant. Over a longer the member's retirement benefit consisting of contributins plus investment returns earned, will be considerably more.
"Over 40 years, the ultimate retirement benefit will increase by approxiamately 9.8 percent."
An example
The table below shows the extra amount in percentage terms that you will gain in your retirement savings at retirement from the reduction in the tax rate:
10 years 1.6%
20 years 4.0%
30 years 6.7%
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